IN 1990, AN Alabama doctor named Thomas Yates bought a new BMW automobile, only to discover later that the paint on one section had been slightly damaged and then refinished. Contending that this had lowered the value of the car, he sued BMW of North America and got $4,600 in compensatory damages, but the jury awarded him no punitive damages. Another Alabama doctor, Ira Gore, also bought a BMW that year and, with the same lawyer, sued over the same complaint. He got $4,000 in compensatory damages, and punitive damages totaling $4 million.
Alabama doesn't have a state lottery, but it has the next best thing: A court system that can transform a modest loss into a gigantic windfall. Unfortunately, Alabama is not alone in its generous and often incomprehensible willingness to levy confiscatory punishment on companies that have broken no law.
The Supreme Court has agreed to consider whether this award, reduced on appeal to a mere $2 million, is unconstitutionally excessive. In the meantime, the case should dramatize to the new Congress that the liability system is badly out of kilter. One plank in the GOP Contract With America is to curb punitive damages, a measure that is long overdue.
Punitive damages are meant to punish -- unlike compensatory damages, which are supposed to pay the victim for the full cost, economic and otherwise, of his injuries. This sort of penalty used to be reserved for "outrageous misconduct," but in recent decades, the standard has been lowered considerably -- which the awards most assuredly have not. The Rand Corp., a California think tank, looked at the Chicago courts and found that between the early 1960s and the early 1980s, the number of punitive damage verdicts rose 25-fold and the average award soared from $7,000 to $729,000.
What is it we are punishing? In a number of cases, corporations have been hung out to dry for conduct that was approved or even required by government regulators. Jury verdicts have driven from the market drugs and medical devices certified as safe and effective by the Food and Drug Administration.
The G.D. Searle Corp. won most of the lawsuits against its Copper-7 IUDs, but the victories didn't pay for the losses: One jury ordered $7 million in punitive damages for a contraceptive that the federal government and several other juries said was fine.
And what atrocity did BMW commit against Dr. Gore? It declined to disclose minor damage that state law didn't require it to disclose. Yet the company was found guilty of "gross, malicious, intentional and wanton fraud." If this omission was so ghastly, why wasn't it illegal?
Nor did the jury stop at punishing BMW for supposedly fleecing a dozen innocents in Alabama -- it set the award high enough to recover the company's alleged profit on some 900 sales in other states, including those where its policy was sanctioned by law. But juries elsewhere are free to punish these sales again.
Unwarranted and excessive verdicts are not the only problem with punitive damages. They are intended to perform a function that lies largely with criminal justice -- punishment -- but they make it much easier to inflict. To convict someone of a crime, even a misdemeanor, you have to prove guilt beyond a reasonable doubt. To win a lawsuit asking for punitive damages in the millions of dollars, you have to show misconduct by a mere "preponderance of the evidence" -- which means that if 51 percent of the evidence indicates guilt and 49 percent points toward innocence, you win.
The Republican proposal offers no more than modest improvement because it applies only to federal courts, which is not where most of these lawsuits are filed, and only to product liability suits, which BMW can attest are not the whole problem. It would restrict punitive damages to three times the amount of the actual damages, narrow the scope of misconduct that can be punished and change the required level of proof to "clear and convincing" -- higher than the current one but less than the standard in criminal cases.
But if Congress enacts these reforms, it may encourage the states to do likewise. The Ira Gores of the world ought to be fully compensated when they are injured. But if they want to become overnight millionaires by a roll of the dice, they should go to Las Vegas.
Stephen Chapman wrote this for Creators Syndicate.